Year: 2014

Could Apple’s purchase of Beats restore the brand to its former ‘cool’ glory?

Posted on by Ashton Wenborn

Once known as the perfect blend of hipster cool and technological innovation, Apple’s reputation has in recent years shifted in the eyes of the public to one of mainstream dominance and bland uniformity. A company that was a decade ago heralded as providing a hip alternative to the stuffy dominance of Microsoft has now reached a point where it’s considered to be mainstream. Gone are the days of your typical Apple user being someone that works in the creative industries. Instead, it’s much more likely that Apple’s core users are white, middle-aged, middle class or extremely wealthy.

Its reputation for innovation has also always been well ahead of its competitors. Turning touchscreen phones and tablets into mainstream products is something that Apple has been credited with, and it did so by designing these products in-house. Despite its colossal cash pile – said to be roughly $150bn at the time of press – Apple has been reluctant to acquire rival companies, instead developing new products itself.

While it may buy a few small start-ups, it has rarely made the sort of large-scale acquisitions that rivals Google and Facebook have become known for. However, the recent purchase of headphone-maker and music streaming service Beats for $3bn has been criticised by many observers as a sign that Apple has run out of ideas and is in desperate need of an injection of the sort of cool that it was once known for.

The deal represents a dramatic departure from Apple’s usual strategy, and some think it’s because Beats has captured a number of demographics that Apple has struggled to attract over the years. Targeting young, fashion-conscious people, Beats has successfully secured a hold of this market as a result of its celebrity endorsements and design, rather than the quality of its audio. The huge popularity among these fashion-conscious groups is also similar to the reaction of the same types of people who a decade ago wanted Apple’s white iPod headphones.

Smartphone preference

African American users 2013:

73%

iPhone

27%

Android

Total market users:

59%

iPhone

41%

Android

Source: Nelson

While neither are renowned for their sound quality, Beats has taken over from Apple’s white headphones as the preferred choice for vain music fans the world over. Senior Apple Executive Eddy Cue may have claimed after the deal “you don’t buy cool, you make the best products in the world and make them cool,” but it certainly seems as though the Beats acquisition is an attempt by Apple to recapture the image it had a decade ago.

Out of ideas?
Although many put the decline in innovation and image down to the death of iconic founder Steve Jobs in 2011, in reality, the company had achieved its mainstream status long before his demise. Ever since the iPhone became the must-have tech accessory, the company’s outsider status has been diminished. Even before that, a surer sign of its status was reflected in its partnership with rock giants U2 – the biggest band in the world at the time – for an iPod advert.

However, some observers do believe that the loss of Jobs to the company, and his replacement by the more reserved Tim Cook as CEO, has led to a decline in innovation and a lack of fanfare to its new products. Such was Steve Jobs’ charisma that the phrase ‘reality distortion field’ was dubbed to describe the effect he had on employees and fans of Apple’s products.

Whereas the innovations that the company would announce were on the face of it quite similar to existing products on the market – such as the many MP3 players available before the iPod – the reactions that they got from the press were said to be totally out of proportion with reality.

Certainly the company hasn’t released anything as ground breaking as the iPad or iPhone since Jobs passed away, and it has lost considerable ground in the mobile device market to the likes of Google and Samsung. However, there are signs that it is looking to address these issues with a range of new products, as well as strategic acquisitions, as seen with the deal for Beats.

Initially reported to be worth $3.2bn, the deal was revised down to $3bn when officially announced at the end of May. While no official reason was given for this decision, the over-eager way Beats founder Dr Dre announced himself as “hip hop’s first billionaire” in an online video two weeks before the announced might have had something to do with it.

USD, Millions. Source: Apple (I) Greater China includes includes China, Hong Kong and Taiwan
USD, Millions. Source: Apple (I) Greater China includes includes China, Hong Kong and Taiwan

Some people have reservations about the deal, however. While Apple founder Steve Wozniak told CNET recently that the Beats deal represented the company “getting back to some cool roots”, Yukari Iwatani Kane, author of the book Haunted Empire: Apple After Steve Jobs told World Finance the thinking behind the deal is “difficult to understand”.

“Apple in the past has done acquisitions where they buy technology or talent, but they’ve never bought a company for its brand and for its ‘cool’. It’s Apple that has defined ‘cool’ for the last decade plus, and so the fact that they have to borrow or capitalise from somebody else, I think is a problem,” said Kane.

“The best reason I’ve heard is that [the deal] is part of Apple’s vision for a connected home. But I still keep coming back to the price. $3bn is a lot of money, and you would think that the company could do a lot with that themselves. The iPhone was developed internally with a couple hundred million dollars, so why does it need to buy Beats?”

Music streaming
The breakdown of the deal seems to value the music streaming service at just below $500m, with the headphones business at over $2.5bn. However, many observers believe the music service is Apple’s main reason for buying Beats. It has lost ground to rivals like Spotify in recent years, with music fans preferring subscription services to the download model of iTunes.

Apple purchase of Beats financial breakdown

$400m

in Apple stock

$2.6bn

in cash

Kane says that buying Beats Music is a response to the decline in popularity for iTunes, but the company is not big enough yet to challenge the likes of Spotify and Rdio. “iTunes is not what it once was, so I can see why Apple would want to capitalise on Jimmy Iovine and Dr Dre’s relationships with the music industry and to come up with something more hip. But the [Beats] music service is so nascent: there aren’t that many subscribers, it’s just in the US, and most of the subscribers aren’t paying anything yet. So if Apple were looking for a music service, you’d think there would be better companies to buy.”

Michael Battista, Senior Consulting Analyst at Info-Tech Research Group, told World Finance that the music service would offer Apple a route to partnerships with the music industry, but the service still needed to be rolled out internationally to turn it into a big music-streaming player. “On the streaming side, a challenge will be maintaining or developing partnerships with labels and artists. Maybe that’s part of what Apple is buying into with the acquisition, but there are still issues such as getting the service out internationally.”

The Beats headphone business is certainly profitable, with revenues for 2013 hitting $1.4bn. However, it has a reputation for being more about style than the quality of its audio. Kane says that this doesn’t match with Apple’s usual approach. “The headphones are obviously very popular, but they’re known more for design than the sound quality. The design is also the complete opposite of Apple’s style. I’m not sure how that fits in Apple’s product offering.”

Battista agrees that the deal may not fit with Apple’s traditional product strategy. “One challenge is the recent image of Beats hardware. It’s become known for being high in style, high in price, but low in quality. Apple is known for being high in style, high in price, and high in quality. That quality, or at least perception of it, needs to rise for the Beats hardware to fit in at Apple.”

Utilising a new approach
Another reason for the deal seems to be Apple’s efforts to attract high profile, charismatic talent. Jimmy Iovine – as the Chairman of record label giant Interscope Geffen – is known for his sway within the music and film industries. Hip-hop icon Dr Dre has also been able to secure a number of exclusive deals and endorsements from artists for Beats in the past. Despite having criticised Apple’s App Store censorship policies in the past, Nine Inch Nails front man and Beats Music Chief Creative Officer Trent Reznor has also agreed to stay part of the company. It is a coup for Apple, which can now boast two very different but equally idolised musicians in Dr Dre and Reznor as members of its staff.

$3bn

total paid by Apple for Beats

$1.4bn

Beats revenues for 2013

Apple also seems to be pushing some of its more charismatic executives into the spotlight, perhaps to make up for the more reserved presence of Cook and the loss of Jobs. Craig Federighi, Senior Vice President for Software Engineering, has been praised for his light-hearted and enthusiastic performances at recent keynote speeches. Frederighi and acclaimed British designer Jony Ive even shared the cover of a BusinessWeek feature with Cook last year, something that would never have happened were Jobs still around.

Aside from the Beats acquisition, Apple unexpectedly hired Burberry CEO Angela Ahrendts earlier in the year to head up its retail division. A high profile hire, Ahrendts is seen as someone that can bring a fashion-conscious mind to the tech giant, just as the market for wearable computing becomes mainstream. All these efforts seem to be part of a new strategy by Cook to bat off accusations that the company has become stagnant under his leadership.

For example, he is actively looking to broaden Apple’s user base into new demographics. Part of the reason why Beats is seen as a good fit is that it is a hugely popular brand among the young black community. It is this community that Apple has struggled to attract, with a survey by Nielsen showing that 73 percent of black Americans own Android-based smartphones. Kane says that these changes appear necessary if Apple is to emerge from Jobs’ shadow. “I do feel that Apple and Tim Cook are trying to evolve, and becoming more comfortable with their post-Steve Jobs reality knowing that they have to do something different, and that they can’t just stick with what they’ve done in the past.

“It feels like Cook is trying to create his own vision and make his own decisions, and what’s interesting to me is that he’s hiring outside talent. Apple’s head of PR [Katie Cotton], who had been at the company since Jobs returned in 1997, has gone as well, and that looks to me like Apple trying to move on. The question to me is whether a new vision can convince. The biggest thing Apple seems to have lost is its ability to inspire and convince everybody that their products are the greatest. What will be interesting to me is how they paint this new vision, because they really haven’t yet.”

Apple's-financial-data-USD-millions

A number of years without much innovation has meant Apple is slipping behind rivals like Google in terms of offering exciting new products, but there are signs that this might be set to change. The recent World Wide Developer Conference in June unveiled a range of new software that was more open and forward thinking than anything from the company in years.

Giving developers access to new tools, as well as the previously closed-off Siri and TouchID, could position the firm at the centre of everyone’s digital lives – especially with home automation, health tracking and payment technologies set to go mainstream. They might just be going back to being the company that that was welcoming to third party developers, rather than insisting on their ‘walled-garden’ model.

iWatch and Beats headphones will look to target the fashion-conscious consumers that are so lucrative. Indeed, iWatch is rumoured to come in a number of increasingly expensive styles, less because of the tech and more due to the stylish materials that house it. Indie musicians and major labels alike trust Jimmy Iovine, meaning it will be easier to secure important rights deals. The artist focused and human-curated model that Beats Music employs will also go some way to making Apple appear less of a software provider reliant on a recommendation algorithm and more of an entertainment platform that has the most knowledgeable people with their fingers firmly on the pulse of their audience.

While no one can predict where Apple will go in the coming years, the challenges it faces are a consequence of its staggering success over the last 15 years. Countless examples of seemingly unstoppable businesses have crumbled throughout history, as a consequence of many factors.

Apple remains in an incredibly strong market position, the challenges of competition and stagnation are however, leading it to rethink the strategies that have made it so successful. While these challenges might be considerable, Apple’s record of pulling out surprises should not be ignored. Although the Beats deal represents a huge – and expensive – departure for Apple, the company is banking on it being able to restore it to its former ‘cool’ glory.

Dissent at Burberry as shareholders vote against remuneration report

Posted on by Ashton Wenborn

Over half of Burberry’s shareholders have chosen not to support the company’s remuneration report after hearing the newly appointed CEO Christopher Bailey is to be awarded a pay package worth approximately £30m.

Just shy of 53 percent of the votes were cast against the report, which held a £1.1m basic salary for Bailey, alongside an optional performance bonus of anything up to 200 percent his of base pay, a £440,000 annual allowance, and a one-time award of 500,000 shares on his appointment in May. Investors were further riled by an additional million shares awarded in 2013, on top of another 350,000 awarded in 2010, scheduled to vest in 2015 and 2018 respectively, and currently worth somewhere in the region of £20m.

The shares are of particular note for Burberry shareholders, who believe financial awards detached from performance to be grossly unjust in a time when the gap between executive and worker pay is growing. However, Burberry is not the first company to suffer at the hands of unsatisfied shareholders. In 2012, Aviva saw 60 percent of its shareholders rally against a golden hello of £2.2m for its incoming UK executive, while a little under 40 percent of Randgold Resources’ shareholders voted against a £2.5m share award for its chief executive last year.

Burberry is not the first company to suffer at the hands of unsatisfied shareholders

The shareholder protest was put forwards as part of a non-binding say on pay vote, meaning the FTSE 100 company will not necessarily be forced into making a change. However, Burberry will be looking to address shareholders’ concerns that Bailey is being rewarded irrespective of performance.  Only 16 percent of shareholders decided not to back Burberry’s overall pay policy, and the Chief Executive’s appointment received an impressive 99 percent backing from those with a say.

The complaint comes at the same time as a High Pay Centre report that the ratio of executive pay to that of the average worker has grown from 60-to-one in the 1990s to 180-to-one today. According to the report, average pay for a FTSE 100 company executive came to £4.7m last year, up from £4.1m the year before. The think tank argues extreme action must be taken to close the gap between worker and executive.

“It’s time to get serious about tackling the executive pay racket,” said the High Pay Centre’s Director, Deborah Hargreaves. “The government’s tinkering won’t bring about a proper change in the UK’s pay culture. We need to build an economy where people are paid fair and sensible amounts of money for the work that they do, and the incomes of the super-rich aren’t racing away from everybody else.”

Ireland is the ‘most recognised financial service centre in the world’, says Mediolanum Asset Management

Posted on by Ashton Wenborn

Ireland was the first country in the eurozone to slip into a recession, and has now bounced back and proved to be fertile ground for the financial services industry. One company that has taken off in the country is Mediolanum Asset Management. World Finance speaks to company representatives Furio Pietribiasi, Adrian Doyle and Luc Simoncini to find out about the organisation’s latest work and products.

World Finance: Furio, what is the benefit of being located in Ireland?

Furio Pietribiasi: The beauty of being located in Ireland is that we have the leaders in the financial service industry, and it has grown now to the most recognised financial service centre in the world, particularly for mutual funds and asset management. Together with technology, because technology nowadays is a big important part of our business and how we innovate in our business. In particular for the component linked to the clients, where more and more we are challenged to provide new services. So Ireland is offering the perfect ecosystem, where you have the leaders on the IT, if you think about this, the cloud capital in Europe, and the internet capital in Europe, and together as the best financial service providers and consultants and supports which enable an organisation like ours to scale very easily up our business over the time.

[W]hat we want to do here is to ensure that we’re going to create products that are going to be relevant for our clients needs

World Finance: Very interesting. Now Furio, how does Mediolanum stay competitive as an asset manager?

Furio Pietribiasi: We actually have made a clear choice in what role we want to have in the asset management industry. More and more, the industry is becoming competitive. We have on one side active management, which is becoming a very important component of the savings and the savings for the clients, but as well it is a very challenging to be successful, and there are less and less that are successful in the space. And then on the other side we have a lot that are moving to the passive management, which again is growing faster and faster. What we have decided to do is to combine what we are good at, and using our skill in combination with the skills of the very good asset managers out there, and to package the best products for our clients that directly address their own needs, and we evolve with them over the time, their needs evolving as well together with the market’s.

World Finance: So Luc, tell me, how do you tailor your products?

Luc Simoncini: Our product development process, MedInSynC, is not just a series of sequential steps. What it is is that all our solutions are developed, evolved and supported with our brand values, core brand values at the heart. So what are they? Three brand values. One is client-centricity. So what we want to do here is to ensure that we’re going to create products that are going to be relevant for our clients needs. It is also investment quality. So what we want to do is to focus on the commercial promise that we made and we can deliver that, but from an investment perspective, so we’re going to be looking at that through MedCube, our investment approach. And the third, brand value, is execution excellence. And what we focus here is to the efficiency of the delivery of our service and products, and what we are aiming to do is to make sure that our clients, our distributors, are delighted by their Mediolanum experience.

So all these three brand values that we’ve seen are embedded together in our MedInSynC product development process to make sure that our clients at the end have an outcome which is a superior outcome for their needs. What is interesting is the journey doesn’t start and stop with the product launches, we go further, because we know market changes, we know our client needs will change, and we feel strongly at Mediolanum that it’s our duty to respond to these changes, to all the time try to figure out how we can evolve our products so they can respond to the changes needed by our clients. And the way we do that is by incorporating our client and distributors’ feedback to improve gradually, incrementally, the products so that we can always deliver on our promises. So I think that’s one of the great advantages of MedInSynC, and if it’s one thing you want to remember, it’s that capacity to allow both our distributors on one side but also our clients to invest in confidence, to invest in Mediolanum solutions that are going to be relevant for them over the long run.

[T]he client is at the forefront of our thoughts when we manage our investment solutions

World Finance: So Adrian, tell me, how do you manage your products?

Adrian Doyle: Well the client is at the forefront of our thoughts when we manage our investment solutions. Our asset management model, whose cornerstone is the investment process MedCubed, focuses on external and internal skills. There are three primary performance drivers in MedCubed, the first of which is asset allocation. This is the most important, and the lever for product personalisation. The asset allocation team combines models that include fundamental macro-analysis, technical analysis, and investor positioning, all of which to determine where we are in the investment cycle of an asset. The second area is management selection. This is where we use a multi-factor approach to combine the optimal blend of best in breed managers to deliver diversification benefits. The third is security, where third party asset managers identify the best securities for our needs. So investment returns are obviously very important, but more important is managing risk and preserving capital. These are essential to long-term wealth creation, so therefore we have a dedicated risk team that looks at operational and financial risk.

In the financial risk, along with traditional risk metrics, we also have developed a program called Mapping the Rocks. Mapping the Rocks combines, in conjunction with investments and risk, to try to identify potential tail-risks in the markets. So overall, through our MedCubed investment process, plus disciplined risk management, we can deliver excellent risk adjust returns for our clients.

World Finance: Gentlemen, thank you.

All: Thank you.

Singapore economy struggles as country changes manufacturing emphasis

Posted on by Ashton Wenborn

Lacklustre activity at Singapore’s factories has dragged the economy’s growth down to 2.1 percent in the second quarter, essentially contracting 0.8 percent on an annual basis. The data from the Singaporean Ministry of Trade and Industry stands in stark contrast to the 9.9 percent expansion in the first quarter of the year and comes down to a shift in manufacturing.

According to analysts, the poor growth stems from Singaporean efforts to move away from low-end industries, particularly in manufacturing, to focus on value-added sectors such as biotechnology and pharmaceuticals. As the island state makes the transition, growth is slowing and, what’s more, mediocre external demand from key trading partners like China continues to put strain on growth.

According to analysts, the poor growth stems from Singaporean efforts to move away from low-end industries

‘Not only may we see slower external demand in 2H 2014 affecting sectors such as manufacturing and wholesale trade, Singapore’s domestic sectors will also continue to face the challenges from the on-going economic restructuring amid tight labour market conditions. In addition, high base effects for GDP growth in 2H 2013 would weigh down further growth risks,’ said Singapore’s United Overseas Bank in a note.

On-year, GDP grew 2.2 percent, well shy of the three percent expected by economists. This decline was due to a 19.4 percent quarter-on-quarter contraction in the manufacturing sector which grew a meagre 0.2 percent, the Trade Ministry said, citing a fall in the output for electronic goods, a main export for the Southeast Asian city. Not surprisingly, the drop in output stems from waning demand from China.

According to economists at BNP Paribas ‘China’s slowing economy is raising concern about potential spill over effects beyond its shores, particularly on the rest of Asia.

‘Economies with high trade exposure to Chinese final demand and commodity-producing countries are…more likely to catch a cold when China sneezes,’ they said in an analysis of 20 years of data in order to quantify the impact of a one percent fall in Chinese economic output on the rest of Asia.

The BNP Paribas research found that 0.7 percent was on average shaved from growth elsewhere because of trade dependency. Singapore, which has seen exports to China as a share of GDP almost triple since 2000, would fare worst with as many as 1.6 percent cut from GDP growth.

This risk of a ‘hard landing’ for growth as China’s economy slows has prompted Asian policymakers to rebalance their economic activity towards domestic, consumer-led demand. It is this shift in manufacturing that is currently causing volatility in the Singaporean economy, but which many are hoping will stabilise growth in the long-term.

Sinners, health junkies and the eco-friendly benefit from thematic investing

Posted on by Ashton Wenborn

Arms, tobacco and oil are for many considered taboo investments – albeit ones with high returns. Nevertheless, being ‘bad’ has got a new appeal for some, as ‘themes’ in investing are taking precedence over traditional investment forms.

Never before has thematic investing been so popular, and yes, the main driver is the urge of many investors to put their money in safe, sustainable and environmentally friendly firms and industries. By putting firms and shares into different categories, thematic investing helps investors home in on global economic trends, as well as invest according to their personal preferences. And despite thematic investing being driven by the recent surge in green investments, it also offers the opportunity to post big bucks in controversial industries that maintain strong returns.

Thematic investing is about identifying macroeconomic trends, driven by politics, culture and demographics, or a combination of all three. Typically, the core drivers behind most thematic investment funds are population growth, rising wealth in the developing world, natural resource scarcity, energy security and climate change.

Essentially, this is a style of investing which ignores geographical boundaries and asks investment professionals to be experts in a particular investment driver or theme, rather than hedging their bets on a diverse portfolio. It is about finding companies that match a particular human need, understanding how this need is being serviced upstream and downstream, and investing in companies that are well positioned to take advantage of changing market conditions. As such, thematic research identifies trends across sectors and geographies, providing investors with enhanced alpha.

Thematic investing is about identifying macroeconomic trends, driven by politics, culture and demographics, or a combination of all three

Typically, such themes are based on political, cultural and demographic changes, which alter the market landscape. Examples include Henderson’s sustainability themes, such as Clean Energy, Health and Social Property & Finance, while new kid on the block Motif Investing offers funds such as Seven Deadly Sins and Gay Friendly, the former of which invests in companies such as McDonald’s, British American Tobacco and gun manufacturer Sturm Ruger, and the latter in firms that promote gay rights, such as BNY Mellon, Disney and Microsoft.

Targeting rookie investors
Motif Investing also offers themes of a less controversial nature, such as BRICS Building, Bulletproof Balance Sheets, Biotech Breakthroughs and Housing Recovery. Either way, its motifs have attracted attention from media and investors, who are all keen to see whether investing in something they truly care about, or consider a key trend, could pay off. Essentially, thematic investing is a way for novice investors to gain access to well performing, albeit more volatile, themes that they could normally only access via high investment fees and sophisticated advisors.

“Clients appreciate understanding the underlying structure and logic of their portfolio in terms of the seven or eight major themes that are embedded in their portfolios,” says Daniel Paduano, a Managing Director at Neuberger Berman, a major investment house. “They also appreciate that these are real world trends and not some arcane nuances of the investment business.” Neuberger Berman’s thematic investing business plays a major role in the firm, and focuses on global education and water themes in particular.

Motif’s site, with its apparently infantile theme names, belies the difficulty of investing thematically. For one, thematic investing is expensive. Buying 30 stocks through a discount broker could cost as much as $300; Motif charges $9.95 to buy or create a collection with up to 30 stocks in it. Secondly, it’s hard for most investors to execute their chosen themes on their own.

Motif allows investors to buy thematic strategies on their own with no advice, while its advisor platform provides investment advice at a low cost.

Similarly, Neuberger Berman has a strong focus on thematic investing because it presents a lower risk compared with other investments that the wolves of Wall Street clamour to get their hands on. “Thematic investing is such a large component of our business because we believe it is a leg up in controlling risk,” says Paduano. “If you get the theme right, the company has the wind at its back. It is then up to the company to execute. Second, it pushes the emphasis on investing, beyond the time frame where the crowds in the investment business are operating and this, too, can be an edge if we get someplace earlier than others.”

Long-term bets
The key to thematic investing is maintaining a long-term outlook. Investing in trends is not something to do for a quick high-yield fix, but rather when looking for that 10-year investment that could double an investor’s savings.

“We try to identify themes that we think will have staying power in the world over a five- to seven-year period,” says Paduano. “These themes are based on movements in demographics, technology, sociology or political changes. They are meant to be enduring and not just fads. Thus, for example, the rising value of water is a theme that goes across developed and developing countries and is an issue that is going to be of increasing importance.”

Despite this, thematic investing is by no means a sure-fire way to make money, as all stocks are not necessarily going to perform well and, as such, it is an investment that presents some risks. For example, while Motif’s Seven Deadly Sins theme has amounted to 24.3 percent in returns over the past year, its stocks in tobacco-producer Philip Morris have dipped significantly over the last 12 months. The assumption is that the trend is correct over the long term, thereby hedging against the lack of diversification and potential dips in performance. In this respect, thematic investing differs from typical active managers, who would build a sophisticated portfolio across sectors, geographies and investment types.

Another concern is that thematic investing sometimes misses the trend, despite having identified it. When an investment manager picks trends – such as the growth in emerging markets, technology developments, or an aspect of the environment, such as water shortages – they have to be able to populate the themes with appropriate equities to invest in. This occasionally leads to a missing link, as you can have strong ideas about a trend, but finding companies that actually capture the ideas and are of sufficient quality and liquidity can prove difficult.

Popular trends
Given that thematic investment can’t rely on diversification as a hedge, it is all about doing significant research. At Bank of America Merrill Lynch’s Global Research unit, Sarbjit Nahal is the Director of Thematic Investing. He has spent years monitoring global economic, political and cultural trends in order to build the best thematic recommendations. So-called ‘megatrends’ have helped the banking group identify some of the strongest investments out there, which have been popular with its investment bank and asset management clients.

“We have tackled seven ‘bigger picture’ global megatrends, which tie strongly into the enterprise-wide investment themes ‘earth’ (energy efficiency, extreme weather and climate change, waste, and water) and ‘people’ (education, obesity, health and wellness, safety and security), as well as ‘innovation’, ‘government’ and ‘markets’,” says Nahal.

This has resulted in Bank of America Merrill Lynch buying stocks in companies that give entry points to key themes such as energy efficiency, including firms dealing in automobiles, building, industrials, IT, lighting and LEDs, energy storage, and transport. This comes as a result of significant research, which suggests the growing demand for energy will lead to an energy crisis and thus drive interest in companies that offer energy-efficient solutions. However, it’s no easy feat to find the exact firm, which will gain massively from a global trend.

“One of the biggest risks is to identify a theme and then go buy a bunch of companies involved without thorough research into that specific company including a judgment as to whether the valuation is attractive,” says Paduano.

Because of this, investment banks and firms who wish to focus on thematic investing need to invest in research capabilities, first and foremost. “Themes are chosen and maintained by doing research in a broad range of subjects through reading books, journals and periodicals covering technology, science, demographics, social and political trends. This is a lot of reading away from Wall Street reports,” explains Paduano.

Themes such as water, health and energy infrastructure have all performed well for investment firms when compared to major indexes. For the long-term investor, betting on major trends could prove to be a profitable, albeit volatile, decision. And for the savvy, modern and socially conscious investor, thematic investing could be one of the best solutions out there for picking and choosing just the right stock. Seemingly, this is why the investment field has never been so popular as it is now.

Pohjola Asset Management excels at risk management

Posted on by Ashton Wenborn

The everyday task of turning a healthy profit in the asset management industry is proving increasingly difficult, as regulatory pressures have impacted an industry already impeded by the many reputational knocks stemming from the financial crisis. Today, only the most enterprising of firms enjoy financial stability, with the principle differentiator between success and failure being an understanding of risk and the ways in which it should be managed.

“I think that the business – if you will – of financial services is in itself risk taking, so risk management is naturally very important,” says Kalle Saariaho, Head of Risk Management at Pohjola Asset Management. “The failures we saw during the financial crisis, they were not all necessarily failures of risk management, but of the trust between company and customers.”

Public confidence in financial services is low, and many demand that more must be done to rekindle the love lost between customer and company if firms are to instil any meaningful sense of trust. “That loss of trust was linked to customers not really knowing the exposure of firms to risk, as well as not trusting that the firms themselves knew their exposure,” says Saariaho. “I really think good risk management should help in both decision-making at the firms and also in building trust towards those firms.”

Jumping through hoops
What’s more, the financial landscape has taken an extraordinary turn for the worse, and today firms must jump through more hoops than in pre-crisis times if they are to negotiate all manner of complex instruments and regulatory challenges. Change has been constant, and demand unerring, as the prospect of profitability is no longer the near guarantee it once was and short-termism a sure-fire route to failure.

The circumstances have called for more adaptive approaches from asset managers, and firms diversify their dealings beyond what they once did. “I think that the situation with regard to risk-taking is actually quite similar to that of pre-crisis, in that many investors are forced to chase risk, given that traditional portfolios really aren’t providing enough returns to fulfil their returns objectives,” says Saariaho. “I think when risk premiums go down, there’s a tendency to add risk, but now we at least hope that risks are better understood and managed.”

€39.2bn

Pohjola assets under management, Q1 2014

19%

Market share of OP-Pohjola Group’s funds, Q1 2014

The loss of trust that has come through irresponsible risk-taking has, if nothing else, served as a lesson in how best to analyse and manage risk. Nowhere else can this better be seen than at Pohjola Asset Management, where risk management is integral to all the company’s operations.

As part of the Finnish financial services group of the same name, Pohjola Asset Management offers both discretionary and advisory investment management services for institutional and private clients. As a well-respected asset manager for Finnish institutions and wealthy private individuals, the firm’s portfolio management services span European fixed income investments, Finnish, Pan European and Eastern European equities, hedge fund of funds, absolute return strategies and real estate investments.

Moreover, Pohjola’s portfolio management team of 36 is the nation’s largest and, together with open architecture of currently 37 international partners, it has posted impressive returns year-on-year. In addition, Pohjola’s 85 asset management experts oversee client assets worth approximately €39.2bn and, owing to thorough analysis, teamwork and management expertise, the company currently stands as the regional benchmark in how best to conduct the business of asset management.

Exposure to risk
The firm has seen risk reporting change drastically over the years. At present, financial institutions must take pains not only to accept, but to cater for, their exposure to risk. “I think first of all, lately there has been much more emphasis on stress testing, not just on the historical stresses, but in really understanding how large movements in market risk factor into a portfolio,” says Saariaho.

In addition to regulatory and technical changes, the perception of risk on the client side has changed drastically. Customers today are far more unwilling than they were to leave their assets in another’s hands without first knowing in detail their exposure to risk. “Clients ask for much more information on risk, so besides the total risk number, these days they expect risk contributions, and relative risks, they really want to understand where risk is taken,” says Saariaho. “Clients, increasingly, are interested in where their asset manager tackles risk. There too – I think – is one of the key elements in building that trust between manager and client.”

Therefore, more must be done to reassure clients about the integrity of financial firms, whether it be through consistent returns or by addressing the concerns of clients on an individual basis – as is very much the case with Pohjola. “I would say that better transparency is one important way to build trust between parties,” says Saariaho, “and trust in this business is very important.”

As with the wider financial services industry, transparency is arguably the single-most important factor on which a sound reputation rests, and it is for this reason that Pohjola makes clear its clients’ exposure to risk on a regular basis and in a clear and concise way.

Building a replicating portfolio
With regards to the specific mechanisms by which risk is identified and assessed, Pohjola employs a number of methods that take into account today’s turbulent markets and ongoing regulatory upheaval. “First of all, we really focus on market risks on the liability side,” says Saariaho. “Usually the client is able to provide expected cash flows, but there may be some optionalities embedded in the liabilities, which are quite difficult to model and may then result in the need for simulations.

“Once you get down to the cash flows, then basically the next step is forming a replicating portfolio, so it in effect is driving these risks within the liabilities using instruments like bonds and options. This replicating portfolio can then be fed into a market risk model, together with assets, for further analysis.”

With respect to specific risk metrics, Pohjola uses both value-at-risk and expected shortfall when it comes to identifying and describing portfolio risk. In addition, a comprehensive suite of stress tests is used to describe portfolio exposure to specific movements in market risk factors. The firm’s risk numbers are always based on a very thorough mapping of investments to their underlying risk factors, including look-through on mutual funds, index futures and benchmark indices, and it is this high precision approach to risk management that distinguishes the firm’s services from those of close competitors.

Working with regulation
Those working in the asset management space have found themselves forced to contend with seemingly endless regulatory demands, and while some believe regulatory upheaval is inhibiting the industry’s innovative streak, others see the process as part and parcel of appeasing clients. Unsurprisingly, those in the latter group have negotiated the regulatory mire with a far greater degree of success than those in the former category and are today able to cater for a much-changed client market.

One of the biggest regulatory changes of late is Solvency II, which in essence entails a fundamental review of the capital adequacy regime and ultimately seeks to establish a revised set of EU-wide capital requirements and risk management standards. “We’ve been working on Solvency II for a number of years now,” says Saariaho. “I think managing the interest rate risk in liabilities has really increased the use of derivatives. Also, developing portfolios, which are efficient from the regulatory capital viewpoint, has been and will be important in the future as the regulations start to take effect.”

However, the Solvency II directive represents a very small part of the wider regulatory landscape, and serves as an indication of the various ways in which asset managers are required to adjust their operations accordingly. Whether it be the Dodd-Frank Act, or the EU Alternative Investment Fund Managers Directive, a new and complex web of regulations is ramping up scrutiny and enforcement on all fronts, leading firms like Pohjola to review their compliance programmes.

As far as creating value and improving organisational dynamics is concerned, risk management is absolutely essential if financial firms are to adequately cater for an ever-changing market and consumer. And although the business of asset management is arguably more complex now than what it was a few years ago, the prospects of those able to endure the transformation are all the better for it. While it’s true that an increased emphasis on risk is closely in keeping with transparency and trust, it’s also responsible for a far more diverse approach to asset management.

Crucially, a sharpened focus on risk management has led many in the business to adopt a far more adaptable approach, and freed companies and clients alike from the consequences that come with irresponsible risk taking.

‘The rise of emerging markets is real’, says London School of Economics professor

Posted on by Ashton Wenborn

Growth in emerging markets has been key to driving living standards in these regions of the world. But a 2014 OECD report suggests the pace of growth has slowed down: a worrying trend for achieving average income levels in these countries by 2050. World Finance speaks to Professor Danny Quah, Professor of Economics and International Development at the London School of Economics, to hear his views on the future of emerging markets.

World Finance: Professor Quah, according to this report China is of course an economic front-runner compared with the other BRICs countries, but in order for China to achieve the 2050 projections that have been laid out, don’t you think that it has to look into its own backyard and consider more seriously what it’s going to do in terms of domestic exports?

Danny Quah: They’re hazards. They’re hazards ahead. China as you say is an economy that’s very heavily trade-dependent, and when you’re trade-dependent in that way, what matters in the world matters to your economy. You can’t just keep growing in a way that’s decoupled from the rest of the world.

But I think China itself has always viewed the reliance on trade as being a device that gives it enough room to develop its own internal consumption capacity. And I think we’re beginning to see evidence on that. That China will have this internal, own domestic engine of growth.

You can’t just keep growing in a way that’s decoupled from the rest of the world

World Finance: But we also know that China has brokered some one-sided deals; whether that be in Asia or Africa. So what does that then do when you’ve got these agreements that don’t necessarily benefit social welfare long-term? I mean, are we looking at short-termism?

Danny Quah: There is a tendency to give the impression that it’s just looking out for itself in a way that screws over the counter-party. That messes them up.

It does not actively seek to do that. It’s not in the role of trying to do down other countries so that it is the leading power.

What it really wants to do is engage in trade, and engage in exchange. And what that means is that if you’re a country that has natural resources, and your government, your civil society, your public infrastructure is not up to exploiting these natural resources in a way that exports to China, what China will do is it will come in and offer to build the bridges and the railroads and the roads that are needed.

Now some of those bridges and roads that it builds might not last the duration. They might last six months, a year or so? They’re something that’s just fit for that purpose. And that does give the impression that it’s after one-sided advantage.

It’s difficult to interpret what they want to do in an alternative way, which is that they’re single-minded in pursuing economic prosperity.

World Finance: But then, going back to my original question about short-termism, does the burden then lie with governments to restrain how much access, and the sort of deals that are taking place? If we not only want to see China develop but other emerging markets too?

Danny Quah: Absolutely, I think all of these other economies that are dealing with China need to build their political systems, need to build their civil society, so that the growth that they get to experience is not short-lived, does not have its benefits accrued to just a narrow elite.

But China’s own view on this is that’s a problem that you the counter-party need to fix. And they’re right.

It’s not our job to tell other countries how to run their systems. They need to do that.

World Finance: Do you think that it’s unfair Professor Quah, this prevailing attitude that China is somehow engaging in industrial espionage? If you want to call it that.

It’s not our job to tell other countries how to run their systems

Danny Quah: It’s fair in the sense that there is almost surely a lot of what in the western system we would understand to be theft of intellectual property rights.

We should also note however that, you know, most recently China has imprisoned the perpetrators of 40 infringers of copyright law. So it is doing its best on preserving an intellectual property rights system.

Economists are actually divided on this, because intellectual property rights – yes, they encourage investment in research and development, they encourage innovation – but at the same time they are a restriction on trade. And any economist who believes that free markets are a good thing, in some ways has got to be against strong intellectual property rights systems.

So there’s a theoretical ambiguity in how we assess China in this.

Then the final point to make is that pretty much every country that has grown to be a successful country has engaged in some form of theft of intellectual property rights.
100-150 years ago, the worst violator in the world was the US! Before that, Germany and the United Kingdom were involved in theft of intellectual property on behalf of their own industrialists against the other side!

World Finance: Why don’t we spread the analysis across some of the other BRICs nations, and we look at free trade agreements. If we are to see the other BRICs players meet those 2050 targets, for instance: are we going to have to see more entrenchment in terms of agreements taking place with regional players?

Danny Quah: Yeah, this is a very tricky point that you make. On trade agreements within the BRICs, and from the BRICs against the rest of the world.

And you and I know that in the last 10-15 years since the development of this acronym, it’s actually China that’s been pushing the frontier on economic development for the BRICs.

So right now this concept might be seeing a little bit of tension from the deep diversity across them.

Some of the membership of the BRICs are manufacturing intensive, export-oriented. They deal a lot with trade, they want the greater degree of trade liberalisation. Some other parts of the BRICs are much more focused on developing natural resources, exploiting natural resources. Until very recently, a number of them were actually quite closed, and very much into developing their own industry, rather than looking out at the rest of the world.

So how this unfolds is going to be really interesting. And it might be that in a year or two we will realise that the BRIC age has seen its time. That we need to move on to a different kind of grouping.

World Finance: I just wanted to touch on that. Do you think that the premise of any report nowadays, being a comparative analysis of BRICs nations. Is it even a fair assessment, given how far China has come? Leaps and bounds ahead of the other nations?

Danny Quah: That’s a really good point, should we be thinking about the world of emerging markets and advanced economies in terms of these standard categories? We take the advanced economies and put them to one side. We take emerging markets and put them to one side. Then we pull a bunch of them out and call them the BRICs economies?

Perhaps it’s better to think about the world as being seamless. That there’s simply a range of gradations.

And any economist who believes that free markets are a good thing, in some ways has got to be against strong intellectual property rights systems

As we look around the world, different economies will be doing things differently. And there’s a lot to be said for a view of the world that even looking at countries might be the wrong category.

When we think about global value chains: our iPhones are designed in California, but they’re put together in China. And along the way they’ve picked up components from Kentucky, chips from Germany, technology from England, programming from Israel…

The end result is a world product. And it’s really corporations, with their global value chains, moving value across national boundaries, that we need to be focusing on. And thinking about development as simply what happens to specific nation-states might be the wrong vision.

But having said that of course, nation-states still do undertake trade policy, tariff policy, monetary policy. They have their nation’s population to look out for. So it’s a complicated world that we’re moving into, and this juncture between what happens in economic value, and what happens to the wellbeing of people is going to be something that we need to pay a great deal of attention to.

At the same time that we realise the rise of emerging markets is real. The rise of the east is real. The world’s centre of gravity has shifted to the far east. And that will happen regardless of whether we think about the world in terms of these value chains, or in terms of these nation-states. And I think it is that that we really need to be looking ahead on.

World Finance: A sobering final thought, thank you so much Professor Quah.

Danny Quah: Thank you very much.

Bonus clip 1: Will China grow old before it becomes rich?

Bonus clip 2: Are India and Brazil the BRICs outliers?

The Democratic Republic of Congo sheds past to fulfil economic potential

Posted on by Ashton Wenborn

The Democratic Republic of Congo (DRC), where violence and corruption once reigned supreme, is in the midst of a renaissance: a transformation from war-torn battleground to thriving epicentre of commerce and democracy.

For too long now, the DRC’s growth has been crippled by civil unrest – oftentimes inflicted by neighbouring nations. However, there now exists a greater willingness for change, as political and business leaders endeavour to rehabilitate the nation, restore its economy and strengthen its core foundations for generations to come.

Today, under the stewardship of President Joseph Kabila and Prime Minister Matata Ponyo Mapon, the transformation of one of Africa’s largest and most populous nations, while nascent, is beginning to take shape.

It is in the capital, Kinshasa, with its nearly 10 million inhabitants, that the country’s economic growth and rehabilitation can best be seen. Impressive buildings are well into their construction phases, skyscrapers are beginning to take shape, and freshly paved highways are lining the city. This is not to say that the change has been limited to the capital, though; the agricultural sector continues to gain in stature and natural resources drive the economy onwards and upwards.

A national plan
President Joseph Kabila, who was initially elected in 2006 and again in 2011, began his leadership of the DRC following the assassination of his father, then-president Laurent Désiré-Kabila, in 2001. Kabila junior saw the need to introduce far-reaching reforms to unite the country after his father’s death and a prolonged period of civil strife, and he and his entrusted advisors looked to rebuild the fabric of the nation and create a framework to better facilitate economic growth.

It is in the capital, Kinshasa, with its nearly 10 million inhabitants, that the country’s economic growth and rehabilitation can best be seen

It was under this framework, entitled Les Cinq Chantiers de la RDC (the Five Pillars of Democratic Republic of Congo), that Kabila developed a long-term plan to improve domestic welfare, supplement the country’s trade policy with foreign governments, and boost domestic investments. Today, as ever, he strives to create a better nation through improved infrastructure, education, higher employment and housing for all, ultimately distancing the population from the country’s long history of socioeconomic turmoil.

Endowed with one of the most promising agricultural sectors in Africa and over $24trn worth of mineral wealth – including copper, diamonds, coltan and oil – the DRC is now at the forefront of exploration, research and trading in Africa. What’s more, the myriad opportunities in the country have inspired the DRC’s political and business leaders to set their sights on securing its reputation as a new African superpower, and to signal to the world that the country has the capacity to sustainably develop and create an environment for growth in Central Africa.

A healthier nation
Improving the nation’s healthcare infrastructure ranks among President Kabila’s topmost priorities, and while South Africa and Dubai have long been traditional healthcare destinations for Africans, the DRC is quickly making a name for itself as a suitable alternative by offering world-class facilities and physicians.

One example of progress in the healthcare space is the opening of the Hopital du Cinquantenaire in Kinshasa, which President Kabila and Minister of Public Health Felix Kabange Numbi inaugurated in March 2014. Funded through a joint venture with Sinohydro, a large Chinese engineering firm, Jubilee is a 500-bed hospital that brings world-class medicine back to the DRC. The hospital will be operated by the Padiyath group, which manages hospitals throughout India and the Middle East.

The Ministry of Public Health is working towards a countrywide healthcare pricing structure that will allow easy access to affordable healthcare for Congolese citizens at this and other planned world-class hospitals currently under development.

The focus on healthcare is significant for the country because it has previously been unable to carry macroeconomic gains into aspects of human development. Regardless of its rich resource base, the DRC is still one of the poorest nations worldwide, and will continue to be so for as long as economic gains fail to reach the entirety of its population. Therefore, the decision to focus on matters such as healthcare signal the beginning of a new era for the country, in which wide-reaching reforms look to benefit all and rid the country of the social injustices that have too often muddied its past.

Also integral to the success of the president’s reform programme are public-private partnerships (PPPs), of which the Hopital du Cinquantenaire is an example. Kabila has sought to build infrastructure and help build businesses through PPPs, which not only efficiently deploy capital, but also create demonstrable changes for the Congolese people.

The country’s decision to enact a new law on February 11 was specifically aimed at PPPs, but was more broadly designed to create an efficient business environment for interested parties and a method by which the legitimacy of PPP projects could be determined. The law dictates the eligibility and content of any public-private contracts, and goes some way to protecting the country against any losses incurred from illegalities.

Another hallmark of President Kabila’s tenure has been creating a far more hospitable business climate. Owing to recent government reforms, business opportunities are growing exponentially, as a greater number of multinationals come to see greater potential in the DRC. Today, investors can take advantage of the nation’s mineral wealth, agricultural opportunities and growing middle class, in addition to a decrease in bureaucracy and light-touch government regulation.

While the DRC has for some time now occupied a lowly position on the World Bank’s Doing Business report, anti-corruption drives of various sorts and a focus on good governance and transparency mean that the country’s prospects are on the up.

According to Steve Dunmead, Vice President and General Manager of OM Group, an American cobalt refining firm, “The business climate in the Democratic Republic of Congo has improved significantly over the past 10 years since President Kabila came to office. He has done a good job, but there is still much to do.”

Multifaceted growth
The country’s economic platform is well founded, with the rate of growth showing no sign of slowing any time soon. In 2013, the nation’s GDP grew by 8.3 percent, according to the IMF and government sources, and growth in 2014 is expected to reach double digits. Although investment, agricultural productivity and infrastructural development have all played a part in boosting the country’s GDP, improved policy and budget planning are only now beginning to bolster its structural deficiencies as well.

Prudent monetary policies have not only encouraged this growth, but have kept inflation at its lowest rate since the nation first gained independence over half a century ago. Whereas in years past, the country has fallen far short of its economic potential, recent reforms and an improved business climate have been crucial in fending off corruption and in instilling a greater measure of stability.

Prime Minister Ponyo believes the country is on the rise. “Our economic performance is the strongest since the 1960s. We have an inflation rate from January to the present of just 0.3 percent. We will register 8.2 percent real GDP growth this year. That makes us number five on the continent in GDP growth. This country is on the move.”

Democratic Republic of Congo Prime Minister Matata Ponyo (l) meeting with Oman Foreign Affairs Minister Yusuf Bin Alawi Abdullah
Democratic Republic of Congo Prime Minister Matata Ponyo (l) meeting with Oman Foreign Affairs Minister Yusuf Bin Alawi Abdullah

In addition to the impressive growth figures, a host of other macroeconomic indicators show encouraging signs of progress. The nation’s currency, the Congolese franc, has remained stable; national wealth has doubled due to more efficient tax collection; and perhaps most importantly, public and private investment has increased significantly.

A former minister of finance, Ponyo has become popular, both in his country and internationally, as a technocrat with the ability and passion to bring about positive change to the Central African nation. Ponyo, a firm believer in stability and the private sector as the key to growth, has worked tirelessly throughout his career to encourage free enterprise in the DRC and Africa as a whole. During his time with the ministry, Ponyo helped change the investment climate of the nation and even set about enacting new measures to protect shareholders and boost capital flow to the country.

Making good on potential
Although the turmoil of the past two decades has put a lid on the country’s economic output, this is not to say that its resource and agricultural potential are any less. Inflows have skyrocketed in the last decade and come to constitute a considerable chunk of the country’s growth, with foreign direct investment having risen from -$116m in 2006 to $3.3bn in 2013.

In 2013 alone, the country’s copper output rose by 52 percent on the year previous, irrespective of any ongoing issues with regard to inadequate power supply and infrastructure. The DRC’s mining sector potential today is far and above most nations, and, if managed correctly, could boost the country’s fortunes and geopolitical clout far and above what they are at present.

One key development in the mining space has been a greater focus on transparency. Whereas the country has for some time enjoyed a great deal of mineral wealth, much of it has failed to translate into material gains for the population, with corruption and mismanagement having starved the nation of the gains it so deserved. Fast-forward to today and a steady stream of government initiatives, as well as increased cooperation with international parties, has resulted in a vast improvement in accountability and openness in all corners of the industry.

The Extractive Industries Transparency Initiative (EITI) has seen the country’s mining sector take on a far more compliant shape. And although the EITI suspended the DRC’s membership only last year for failing to “meet all requirements,” the country was more recently lauded by the Oslo-based initiative for “dedicated efforts in a challenging environment.”

The nation’s willingness to subject its mining revenues and spending to sharpened public scrutiny again illustrates the lengths to which the country as a whole is willing to go in order to cement a more responsible reputation among the international community. Given that the DRC is endowed with tremendous natural resources, Prime Minister Ponyo sees the need, and opportunity, to diversify the nation’s economy away from commodities towards services and agriculture.

“While the country is very wealthy in natural endowments regarding mineral resources, it is imperative to diversify beyond this wealth alone to propel the Democratic Republic of Congo to a state that can compete economically at a global scale,” says Ponyo.

In addition to mining, the DRC is looking to further develop its agricultural sector, considering it is one that is unrivalled in all of Africa. Given the potential for water, land, energy and various other inputs, the nation can develop an industry of commercial farms offering fishing, livestock and vegetable production, connected to a coherent network of production and food distribution channels.

The approach will enable the country to take advantage of the entire supply chain of food production, from farm inputs to the development of effective irrigation, distribution and transportation systems. According to Prime Minister Ponyo, “Agriculture must be one of the main sectors of focus used to spearhead the Congolese economy to unprecedented levels.”

Investment in agricultural extension services, research, energy, science and technology is also vital to developing a world-class agricultural sector. Significant attention to those sectors will create an opportunity not only to drive the economy by fortifying the export market, but also to help in the fight against hunger and malnutrition throughout the DRC and the African continent as a whole.

The current plans for the agricultural sector fall within the framework of the national strategy for food security. Encouraging public-private partnerships to harness these large-scale investments, Ponyo encourages investors to consider the potential value of the industry. To support agriculture and encourage private-sector participation, Ponyo developed and launched a nationwide programme known as the National Agricultural Investment Plan (NIPA). In short, the NIPA’s main objectives are to ensure food security and to develop the agribusiness sector. Its first project will be the development of 16 large agro-parks.

Democratic Republic of Conogo Prime Minister Matata Ponyo (centre left) with President Joseph Kabila (centre right)
Democratic Republic of Conogo Prime Minister Matata Ponyo (centre left) with President Joseph Kabila (centre right)

According to Councillor John Mususa, one of the leaders spearheading the project, “These parks will serve as an important part of the country’s rehabilitation and construction process by providing access to agricultural inputs and by combining laboratories, training facilities, storage centres and health facilities.”

Ponyo believes developing the agriculture sector can have the most significant positive impact on the population. For example, if the sector grows by six percent over the next decade, the level of Congolese poverty will be halved. Many of the issues plaguing the nation today can be resolved through investment, organisation and proper management. The creation of food security, paired with an increase in employment and social welfare, will help the country continue on its path to prosperity.

Power sector as growth catalyst
Apart from agriculture, a robust energy sector is also key to driving economic growth in the DRC, especially as its large-scale industrial sectors remain an area of significant growth. In a continent plagued by underdeveloped power generation capabilities and transmission facilities to transport power over large distances, the need for development in this sector cannot be understated. Nonetheless, the nation’s power sector is beginning to see significant investment and development from indigenous firms in addition to international companies and governments.

Large-scale investments in the Inga Dams, for example, are seen as a key component of the Congo’s – and Africa’s – future. Comprising a series of hydroelectric dams, the Inga Dams hold the potential to not only provide electricity to the DRC and all of Africa, but also the capacity to export energy to Western Europe. The centrepiece of the Inga Dams, the Grand Inga Dam, is the world’s largest hydropower project and is an instrumental factor in Africa’s future energy strategy.

The country’s electrification percentage rate is still far short of double figures, and many businesses to this day cite lack of energy supply as the number one obstacle to progress. The issue is especially pertinent in rural communities, where electrification rates stand at one percent and act as a major contributor to the country’s enduring issue of poverty. The Inga Dams will help to rid the country of one of its biggest issues and hopefully set the country on the path to self-sufficiency.

In 2013, the site of the Inga Dams was visited by Dr Rajiv Shah, the head of the US Agency for International Development (USAID), who not only lauded the progress of the facilities, but also pledged aid from the US Government to further develop the project.

Harbouring the potential to generate some 38,000 MW of energy at a cost of $80bn, the immediate effects of the dam would help power South Africa, Botswana, Angola, and Namibia in the short term. The capacity of the power production would also tower over the current record holders – the Three Gorges Dam in China and the Itaipu Dam in Brazil.

Additionally, the Inga Dams are vital not only for providing energy to the soon-to-be one billion inhabitants of Africa, but also for the industries that will drive African nations into self-sustaining superpowers. By allowing access to readily available and cost-effective energy – a gap that exists today – manufacturing, agricultural and mining industries will be able to reach new heights. Likewise, the powerful Congo River, a celebrated natural resource of the country, has the potential to power African nations and feed the continent.

Growth in the DRC is real, although the abundant opportunities in the country have yet to be fully uncovered. The country has posted impressive GDP growth for close to a decade now; however, it is only with the introduction of recent reform programmes that the DRC’s potential has expanded to all corners of the country, and to the international stage.

The changes in the DRC are indicative of a total transformation from a war-torn nation to an emerging African superpower. Under the leadership of President Kabila and Prime Minister Ponyo, the nation is in the early stages of a renaissance that will set the standard throughout Africa and the developing world as a whole.

India’s budget gets mixed reviews, Indonesia surges post-election

Posted on by Ashton Wenborn

Indian Prime Minister Narendra Modi’s new government has unveiled a budget it said would revive growth after the country has endured the longest economic slowdown in 25 years.

Finance Minister Arun Jaitley said he would raise caps on foreign investment in the defence and insurance sectors, maintain a low budget deficit, and launch tax reforms to unify India’s 29 federal states into a common market.

Two years of economic growth below five percent has exasperated investors and India’s 1.2 billion population as it dropped from 10.3 percent in 2010 to 4.4 percent in 2013. By boosting FDI limits in defence and insurance ventures to 49 percent from 26 percent, and getting planned infrastructure spending back on track, Jaitley vowed that Asia’s third largest economy would expand at an annual rate of 7-8 percent within three to four years.

This commitment to fiscal discipline was stronger than analysts had expected

Modi won a landslide general election victory in May with a pledge to create jobs for the one million people who enter India’s workforce every month. He has since warned that “bitter medicine” is needed reverse high inflation and the worst slowdown since free-market reforms in the early 1990s unleashed an era of rapid growth.

Fiscally tough budget
Surprisingly, Jaitley vowed to adhere to the daunting budget deficit target – of 4.1 percent of gross domestic product for the fiscal year ending March 2015 – that the government inherited from its predecessor.

“I have decided to accept this challenge. We cannot leave behind a legacy of debt for our future generations,” Jaitley said, adding that the budget deficit would be reduced to 3.6 percent in the following two fiscal years, according to Bloomberg.

This commitment to fiscal discipline was stronger than analysts had expected with the deficit already approaching half of the annual target just three months into the fiscal year. Nevertheless, Jaitley maintained that “fiscal prudence is of paramount importance”.

Prior to the announcement, sources had revealed that the budget would also look to impose a national Goods and Services Tax, ensuring a more fair distribution of revenue between the country’s states. Jaitley also announced a review into retrospective tax claims blamed for hindering foreign investment after companies such as UK’s Vodafone were hit with massive demands.

However, the budget was not enough to reassure investors as the Indian stock market retreated for the third day running following the budget announcement, leading to the biggest loss in nine months. Without any major reforms or measures to deal with the immediate issues, investors are selling out. A key concern is that oil and food prices will rise following the budget deficit target, but more importantly, because a weak monsoon this year threatens India’s food production and a continued dependency on energy imports is sending oil and gas prices through the roof.

Nevertheless, Jaitley maintained that India has adequate food stocks to cope with a drop in output and vowed to keep an eye on price stabilisation for the timebeing.

Indonesia rallies post-election
In related news, Indonesian stocks jumped more than two percent to one-year highs, as investors bet on an election win by Jakarta Governor Joko Widodo or Jokowi as he’s commonly called.

Both Jokowi and ex-general Prabowo Subianto have declared themselves the winner after elections on Wednesday revealed contradictory preliminary results in what would seem to be the closest election ever in Indonesia.

Official results won’t be announced for another couple of weeks and in the meantime, investors are hoping that Jokowi will take the lead of the MINT economy soon enough, as he’s for reforms and greater transparency, while Prabowo has a more protectionist agenda.

Faith in Jokowi’s win also sent the rupiah flying and further boosted the Indonesian markets which have had a stellar year, surging 20 percent so far. Despite this, the election is key because it comes at a time when economic growth has dropped to its lowest level in over four years and it will fall on the new Indonesian president to ensure that the Asian MINT doesn’t lose its lustre.

MP Asset Management ensures growth of Iceland’s economy

Posted on by Ashton Wenborn

The global financial crisis has seen Iceland’s banking industry take a serious hit to its reputation. The collapse of all three major commercial banks sent shockwaves around the financial markets, causing many international investors to turn their backs on the country’s financial institutions.

The banking crisis saw a range of new regulations introduced by the Central Bank of Iceland (CBI) and the Financial Supervisory Authority (FSA), so that the country could get back on a steady financial footing. Many institutions have collapsed as a result of the changes, with just a few firms managing to survive in the new environment. Those that survived needed to adopt a more prudent and analytical approach to investing to ensure that they were not tainted by the carefree ways of firms like Kaupthing, Glitnir and Landsbanki.

Recent years have seen a number of smaller, specialist firms rise up from the ashes of the banking crisis and restore some of the faith that the global investment community previously had in Iceland’s financial markets. One of these firms is MP banki, which has battled through the crisis thanks to its commitment to prudent and analytical strategies.

Recent years have seen a number of smaller, specialist firms rise up from the ashes of the banking crisis

Founded as MP Securities in 1999, MP banki became an investment bank four years later with a full range of investment banking services on offer to both institutional and individual clients. It gained a full commercial license in 2008, and has steadily grown its operations from its headquarters in Reykjavik ever since. The firm has also maintained a diverse number of shareholders, without any single investor holding more than 10 percent of total equity.

Last year proved to be a successful year for the firm, with the asset management side of the business performing especially well. It has remained highly liquid, with cash holdings well above the minimum requirements set by the FSA and CBI. The group has achieved this steady growth through its focus on providing businesses with specialised banking services that draw from its employees’ expertise and knowledge of the domestic market.

World Finance spoke to Sigurður Hannesson, Managing Director of MP Asset Management, about how the company has managed to maintain its steady growth in recent years, playing on its knowledge of and expertise within Iceland’s markets.

What role does your company’s asset management arm play in its overall banking operations?
Established as an asset management company in 1999, MP Asset Management has been the cornerstone of MP banki’s operations from the beginning. Now, MP Asset Management offers comprehensive solutions in major asset classes, such as fixed income, equities and real estate; both in the local and international markets.

Why do you consider a smaller amount of assets under management to be an advantage for your asset management arm?
A relatively small size of assets under management compared to the market is on the whole considered to be an advantage. The main reason is that we can more swiftly change our strategies without having to impact prices. That gives us a certain freedom.

What is your investment philosophy?
The main criteria in our investment philosophy are active management style, flexibility of investment policy and a strategic and tactical view of the markets. The strategies are actively managed and the goal is to achieve outperformance in comparison to our benchmarks. Investment policy for each strategy is flexible and is the main driver for outperformance. The size of our assets under management gives us more freedom to revise asset allocation.

Fundamental analysis of bond and equity markets is the basis for our strategy, and this plays an important role for our performance, in addition to our reporting on the micro and macroeconomics in the economy as a whole. Momentum, technical analysis and arbitrage are the basis for this tactical view. The role of the fund manager is to run the strategies according to the investment committee’s advice and find opportunities for tactical allocation.

How do your services differ between individual and institutional clients?MP Asset Management strives to have close connections to both individual customers and institutional clients. All clients receive a thorough service and reports on their portfolio regularly, and by request. However, there are some differences between clients’ requirements for information. Institutional clients often require custom reporting packages. In addition, service to institutional clients may include more frequent update meetings at which their portfolio and performance is reviewed. Otherwise the services provided to individuals and institutional clients are similar.

Which markets is MP Asset Management represented in and why?
Our aim is to be the first choice for individuals and institutional investors by providing quality services and consistent long-term performance. MP Asset Management offers investment services in the local market to domestic and international investors. Successful partnership with global investment banks for 10 years has given MP Asset Management the opportunity to offer Icelandic investors top class services in global markets.

Could you explain a little about your stock-picking tactics?
Our process is based on a thorough fundamental analysis of all companies listed on the Icelandic Stock Exchange, as there are only 14 companies listed currently. We do a discounted cash flow valuation with three scenarios – bear, base, bull – to capture the standalone risk, and subsequently the companies are ranked relatively. The stock portfolio consists of the highest ranked stocks with certain restraints that relate to diversification and liquidity. Returns of the Icelandic Equities fund in 2013 were about 46 percent, far above the OMX Icelandic equity index that returned about 20 percent during the same period.

Three of your strategies invest in equities. Which ones do you typically go for?
Our equity strategies invest in domestic – in particular listed – equities. The equity market is gradually gaining strength, with 14 listed companies – up from four in 2011. There have been 10 IPOs over the last couple of years, and value has been added to the portfolios by participating selectively in IPOs. On top of that, these portfolios have got exposure to private equity that is aiming at an IPO within 12 months.

What tech innovations does MP Asset Management have?
We know that transparency matters to our clients. Our clients have access to online portfolio overviews that enable them to be up-to-date on positions and trading activity. We have put effort into improving our IT systems so that we can provide our clients with even better information such as specific statistics on risk and return.

How do you approach risk in the current regulatory environment?
With an uncertain environment we are careful about political and economic risk. We believe that understanding the risk comes first. Then it is possible to decide whether or not to take the risk. This approach has given our clients an advantage in a tough market environment, and has lead to higher returns.

What can we expect from MP Asset Management in the year ahead?
Although still dealing with the aftermath of the 2008 economic collapse, the Icelandic economy is picking up, with healthy growth last year. There are challenges ahead, but they can also be seen as opportunities. The equity market is gaining strength and investors are gradually regaining confidence in the market. We are looking to exploit opportunities in equity IPOs as well as in the bond market. We expect a further increase in the number of accounts and decent returns in 2014.

‘Simplicity and standardisation’ will benefit finance industry, says ICC Banking Commission Chair

Posted on by Ashton Wenborn

Regulators are clamping down on financial institutions across Europe, hoping to foster a more harmonised and resilient banking environment. But will their efforts be in vain? One report by the International Chamber of Commerce (ICC) suggests such regulation will impede growth and free trades, stunting the continent’s economic growth. World Finance speaks to Kah Chye Tan, Chair of the ICC Banking Commission, to discuss its findings.

World Finance: Well Mr Tan, how important are the 2014 Trade Register Report findings, and how surprising?

Kah Chye Tan: When we first started, the register was really there to address regulatory capital matters. But increasingly we find that the register is being used as a tool to help alternative investors to invest in a new asset class – in this case, it’s trade finance.

World Finance: So do you think the cacophony of regulations are stunting growth in Europe?

Kah Chye Tan: The jury is still out. There is definitely room for a more reflective, and more accurate, set of regulations to govern trade finance.

The jury is still out. There is definitely room for a more reflective, and more accurate, set of regulations to govern trade finance

I will say that in the last five years we have seen many proactive changes being put in place by the regulators. But like everything else, there is always room for improvement.

World Finance: Well 60 percent of respondents felt the lack of harmonisation of compliance standards created problems. So would you say transparency hinders competition?

Kah Chye Tan: It does. It creates a very uneven form of competition. So from that perspective, yes: it does hinder growth, and actually it can go against the very objective of the regulation, which is to promote recent management.

So giving you a quick example. The regulations have improved such that there is no longer a 365 day floor for letters of credit as a product. But this has not been consistently applied across all trade finance products. And definitely not consistently applied in all countries.

World Finance: So would you say then that there’s a call for regulations to be standardised throughout world markets, to create more of a fair playing field?

Kah Chye Tan: I think the regulators’ job is very tough! On one hand we want simple regulations; on the other hand we want it to be sufficiently granular to differentiate the risk profiles.

I do believe that simplicity and standardisation will benefit the industry as a whole. I think there’s a lot of feelings in the marketplace today, that the regulations today are looking more and more like a black box: it’s difficult for people to understand.

When you have a set of regulations that’s difficult for people to understand, no matter how good the intentions of the regulations, you run the risk of the means and the ends getting mixed up. You know, the bankers chasing after the means, rather than chasing after the ends.

So simplicity is important.

World Finance: Well there’s certainly a feeling that more transparency equates to less profits. So who benefits from more transparency?

Kah Chye Tan: Actually, I think more transparency will promote a more sustainable form of banking in the medium to longer term.

In the shorter term, yes, you know, as with every change it will create some discomfort. And I guess that’s the reason why people tend to think transparency results in lower profit. But that’s a very inappropriate short-term view. In the medium to longer term, the transparency actually builds a much more robust banking environment.

Yes, maybe profit will go down for the banks, but you know what? I think there will be more players, more companies will benefit from it, and it will mean more opportunity for us to finance trade.

[T]he transparency actually builds a much more robust banking environment

World Finance: So the ICC’s report suggests that banks financing trade should be less stringently regulated than other areas of finance. Why is this?

Kah Chye Tan: I wouldn’t say it is less regulated or more regulated; I think it is a different set of regulations that is needed.

There is a general market acceptance – and the data from the trade register further reinforced – that it is a very low risk product.

The loss history can be as low as 0.03 percent. It’s a fraction of AAA corporate bonds’ default rate.

To manage trade finance as part and parcel of the broader corporate range product, we run the risk of the law of average. When you put trade finance with more or less risky products, and you draw an average – say the average AVC, as an example – some products that are higher risk are going to benefit from an average AVC. Some products that are lower risk, as in the case of trade finance, will not benefit from it. In fact, will be disadvantaged by it.

So for that reason, I don’t think it’s a case of whether we are asking for more favourable regulation, or less favourable regulations; we are asking for the right regulations.

World Finance: So trade and export finance is a significantly low risk banking finance technique you said; so where are the high risk areas, and do they give more profits?

Kah Chye Tan: All else being equal, the longer maturity transactions will have a higher risk. All else being equal, a product that is further and further away from the real economy will have a higher risk.

In the case of trade finance and export finance, these are relatively short-term products. These are products that support the real economy.

World Finance: Well I want to take a little look now at the Basel accords; what are the problems would you say, with these?

Kah Chye Tan: What is needed is greater differentiation by the different risk profiles of the different banking products. Credit cards are 30 days, housing loans are 30 years. Trade finance is 90 days. Project finance is 10 years. Trade finance has nothing to do with credit derivatives.

We need to put these various products in their logical buckets, and come out with a logical set of regulations to manage each bucket.

The law of averaging is a case of oversimplification.

World Finance: So finally, what’s the key to driving liquidity in international trade?

Only through an active tripartite dialogue between the regulators, the bankers, and the businesses, will we come out with the right set of regulations

Kah Chye Tan: An activate dialogue between the regulators, the bankers, and businesses – the importers and exporters – is very important.

Only through an active tripartite dialogue between the regulators, the bankers, and the businesses, will we come out with the right set of regulations. Especially in the case of liquidity.

Trade finance is as short as 90 days. The average is 90-100 days. There’s a current set of regulations that requires 50 percent of funding be long-term: to finance short-term 90-100 days trade transactions would be too onerous. And we will end up charging the clients more than what is needed. And that’s the danger that we’re trying to avoid.

World Finance: Mr Tan, thank you.

Kah Chye Tan: Thank you Jenny.

Too much regulation will hurt Europe, as well as the banks

Posted on by Ashton Wenborn

When BNP Paribas was recently asked to pay a record $8.9bn fine for having breached US sanctions against countries like Cuba, Sudan, Iran and North Korea, it sent shockwaves through the global financial industry. For the first time ever, a bank is facing criminal charges and having to pay a fine so sizeable that it could seriously derail its finances, as well as the overall European economy.

For the US, the investigation into, and ensuing guilty plea of BNP’s processing of transactions on behalf of US-sanctioned countries, was a first major win against a European financial giant. Shortly after the verdict, media and industry commentators alike began speculating whether the magnitude and repercussions of such a punishment would set precedence for other banks. Other banks should start saving now, and prepare themselves for significant judicial implications.

Several media sources report that the regulatory mafia, which hammered down on BNP Paribas, is probing several other European banks, including Germany’s Commerzbank.

According to The New York Times the Manhattan District Attorney’s office is working with the Justice Department, New York’s banking regulator and the Federal Reserve on the Commerzbank investigation, probing whether the bank breached rules regarding Iran, Sudan, North Korea, Myanmar and Cuba. The case is said to likely cost Commerzbank a mere $500m fine, as part of a deferred prosecution agreement, which would suspend criminal charges in exchange for the financial penalty and other concessions. Commerzbank said in its 2013 annual report that it had set aside €934m ($1.2bn) in provisions for legal proceedings and recourse claims, so the fine’s size is not likely to have shattering consequences. What is far more concerning is the increased focus on European banks alone.

Some critics have questioned why US authorities have set their eyes on European banks and turned away from
domestic cases

The Commerzbank probe is said to be a precursor to much bigger things, namely a smack down on Germany’s heavy hitter, Deutsche Bank. France’s Crédit Agricole and Société Générale, as well as Italy’s UniCredit are among other lenders being investigated by US authorities. This will all in all cost European banks a further $50bn in litigation and settlement costs according to analysts from Morgan Stanley. European firms have already set aside or paid out more than $80bn since 2009.

Some critics have questioned why US authorities have set their eyes on European banks and turned away from domestic cases. The answer, authorities say, is that American banks by and large avoided processing transactions for Iran and Sudan. Still, it is worth questioning why US probes have focused on tax evasion by European banks and, lately, those who have circumvented US sanctions. To this extent, UK and EU authorities have been a lot slower to prosecute and more lenient on US banks, which largely were at fault for the 2008 financial crisis and to some extent can be blamed for the European recession. Whether this comes down to the well-known lack of resources and qualified personnel within watchdogs such as the UK’s Financial Conduct Authority, could be one explanation, but more probable is the argument that US regulators are simply more keen on prosecuting European banks and bringing in major settlements – despite the consequences this might have for the European economy.

It’s without doubt that probes into financial misconduct are necessary. The financial crisis and its widespread consequences are proof of the need for tough regulation when big banks act badly. That said, it does raise concerns that US authorities seem to be exercising a hegemonic muscle that no one else can match. With Europe’s economy only just teetering on recovery, its worrying that there seems to be no consideration for the consequences of destabilising France’s biggest bank by assets, or going after banks that are partly owned by the German state and could seriously damage diplomatic relations. In the case of BNP Paribas, French President Francois Hollande even attempted to intervene by pleading for a lesser punishment, but to no avail – US prosecutors persisted.

The debate has for some time centred on whether banks can be too big to jail. Agreed, no bank should avoid consequences for a heinous lack of respect for national laws and financial regulations. That said, it must be possible to apply some sort of balance, for if BNP Paribas was the precursor, who’s to say what size the next fine will have? And whether the bank in question will be able to pay? Certainly, banks that have indisputably broken sanctions should be punished, but it’s also worth keeping in mind that regulation can go too far, too soon.

Dunn Loren Merrifield on Nigeria’s exceptional economic growth

Posted on by Ashton Wenborn

As the largest economy in Africa, Nigeria is a very attractive investment prospect. One company that has paved the way for economic growth in the country is investment house Dunn Loren Merrifield. World Finance speaks to Sonnie Ayere, Founder and CEO of the company, to find out about the country’s financial market, and its opportunities.

World Finance: Well Sonnie, Nigeria has seen exceptional growth over the past few years, but in terms of the financial market, how developed is that?

Sonnie Ayere: The financial market I would classify as still at the frontier to emerging market levels. The real basin of Nigeria’s economy has obviously moved Nigeria into that larger economy spot, the 26th largest in the world today. The financial market, however, does not reflect that sort of composition of what makes the GDP of Nigeria, and that’s why you have today discussions of the telecom companies should be floated on the exchange, in other words the exchange should reflect more of the economy than the banks. Today the banks are actually, well I would say they dominate the financial markets, and I think it needs to be much much broader in terms of its outlook, products and reach.

The key areas that exist medium to long term: the power sector, for obvious reasons, the agricultural sector is also another area that is becoming very,
very attractive

World Finance: Well how involved are you in the development of the Nigerian financial markets and in fact the country as a whole?

Sonnie Ayere: As a person and as a firm, we are pretty much in the thick of things, right from my first role when I left the World Bank, the IFC, in fact when I was actually working with them at the time I helped the Nigerian economy, or the Nigerian government, to develop a bond market. That was actually my first major assignment in Nigeria, and now we’re looking at the housing market. I’ve also served on several committees, from the stock exchange and from the securities and exchange commission, and we’re actually working on one right now to actually revolutionise the way the market players actually operate within the market to make it a lot broader and much deeper.

World Finance: Well you company acted as advisors to set up the Nigerian mortgage refinance company, which was launched earlier this year, why was this so important?

Sonnie Ayere: Housing in Nigeria, if you think about the population, currently 170 million people, mortgages to GDP is about 0.x whatever percent, it’s a nominal number. So the whole idea of having this company, which is as a public private partnership, is actually to now provide that catalyst to help this market grow, and just reading the papers this morning, they’re talking about a market of about 60trn, I think that’s about half a trillion pounds, in terms of even just to cure the housing deficit. So this is quite an important company, that actually becomes that sort of catalyst to bring in both the demand side and the supply side of the housing market together, and hopefully try to make housing a bigger component of the GDP of Nigeria going forward.

World Finance: Well looking at the Nigeria stock market now, and after a poor performance in the first quarter things are starting to pick up, so what opportunities are there for investors?

Sonnie Ayere: The key areas that exist medium to long term: the power sector, for obvious reasons, the agricultural sector is also another area that is becoming very, very attractive. The housing market, certainly is a big opportunity. And then the other areas which have been the normal, mundane areas that investors have normally played in: the banking sector, the telecom sector, etc. So it is a very fertile ground, but again, obviously certain issues and risks do exist, and that’s why it is still to my mind a frontier market, and investors obviously need to be cognisant of the risks that exist, but then the rewards are also compensating for those risks.

[I]nvestors obviously need to be cognisant of the risks that exist, but then the rewards are also compensating for
those risks

World Finance: Well looking to the future now, and what do you anticipate to be the future trends, and challenges in fact?

Sonnie Ayere: In terms of the trends, from an investor perspective, I think it really depends to a large extent on the security situation. Given what’s going on in Nigeria today, one can’t ignore that fact, and I think it largely depends on how that’s handled. If handled very well, I think the potential going forward is absolutely tremendous for both domestic and international investors.

World Finance: Well obviously, we’re coming up to the elections in 2015, so how safe would you say Nigeria is for investors?

Sonnie Ayere: I always like to say to investors, we need to get out of this sort of cyclical, every four years there’s an election and then everything has to stop until it’s over, and then we can start again. It has to get to a point where, there’s the elections, yes, that’s normal, and investors just continue. The one advice I would give to investors is just, generally speaking, to monitor how the security situation is being managed, and if managed well I see absolutely no disruption in terms of investor appetite for the sort of yields and returns they’re getting out of that country today. So my view would be, yes continue to invest, but of course monitor what’s going on.

World Finance: Sonnie, thank you.

Sonnie Ayere: Thank you very much.

Stock exchanges to power Africa’s economic development

Posted on by Ashton Wenborn

Stock exchanges can be considered a motor for economic development. In Africa, the number of bourses has grown from five to 25 in just 20 years, as its economy and the need for regulated stock markets has grown. At the cusp of what could be one of the biggest economic booms yet to be seen, the continent is developing its financial infrastructure like never before, yet the overall sector is lacking, and stock exchanges in particular need to step it up.

Issues such as transparency, lack of technology and a surprisingly small amount of IPOs are all contributing to inefficient and ill-equipped stock exchanges across the region. There is an opportunity here to seriously contribute to Africa’s economic development, and industry experts are calling for governments and stakeholders to focus on stock exchanges and get them up to par.

Companies listed on stock exchanges:

1,000 approx.

Sub-Saharan Africa

1,700 approx.

India

3,500 approx.

China

Emphasis on African stock exchanges is even more pertinent now as the region is seeing a growing demand for new issues. Over the last three years, valuations achieved through private equity exits in Africa via a stock market listing, yielded a higher return than could have been achieved in any private transaction, proving that investments in African listed firms are paying off like never before. What’s more, the amount of investors looking to invest in African small-, medium- or large-cap funds is growing as this market continues to develop. Yet the number of listings is lower than comparable regions, with just over 1,000 listings in Sub-Saharan Africa, but 3,500 and 1,700 firms listed in India and China respectively.

Exchanges must step up
This provides challenges to tapping into Africa’s impressive growth. The region’s GDP grew by 57 percent on a purchasing power parity basis between 2005 and 2012 (see Fig. 1), slightly ahead of Brazil and Russia, and markedly ahead of developed economies like the US and Japan, which only grew around 20 percent. However, Africa’s growth lags behind that of China and India, which doubled the size of their economies over this period. According to experts, this comes down to the lack of access to listed equity in Africa.

“Ideally, investors in listed equity look for markets with high liquidity, many listed companies and high standards of governance. In many African markets, not all of these criteria can be met,” explains Rory Ord, the Head of RisCura Fundamentals, an African valuation service-provider.

One key issue is that African stock markets are often dominated by a handful of large corporations. For example, the Dangote Group makes up about 30 percent of the Nigerian Stock Exchange, the Rwandan stock market has only three listed companies and trading in shares is less frequent and limited to a few firms. This stands in stark contrast to Nigeria being Africa’s largest and fastest-growing economy. What’s more, many bourses do not have access to reliable and up-to-date information technology; in some, trading is done manually and in many cases, the general public does not have confidence in the integrity of stock exchanges.

“There are issues that certainly require attention – primarily, the enforcement of reporting quality, timing and frequency. Secondly, some exchanges are slow to adopt modern technology, which hampers the transparent price discovery mechanism, as some exchanges are still using open outcry. Lastly, restrictive trading times prevent investors from fully taking advantage of changing market information,” said Alain Nkontchou, Managing Partner at the Johannesburg-listed asset manager, Enko Capital.

More IPOs needed
The lack of African listings is largely thanks to the high financial costs associated with going public, such as initial and annual listing fees, as well as the direct and indirect costs that come with meeting exchange reporting deadlines and disclosures. What’s more, a lack of information on the advantages of listing and concerns about losing control have made many entrepreneurs wary of disclosing business details and ceding control.

“A limited number of listings in various African markets means that fund managers have a small number of promising shares to invest in. This leads to a lack of diversification of portfolios, and regional and sector concentration of assets. In addition, we have seen price distortions on liquid securities given the dearth of investable stocks,” says Nkontchou.

Because of this imbalance in the supply and demand of new issues, IPOs present a good opportunity for African entrepreneurs and for the growth of the stock exchanges on the continent. Statistically, most new listings in Africa perform well and are heavily over-subscribed, as investors continue to flock to the few listings made. Thus, it may prove crucial to change practices in African stock exchanges to attract foreign investors.

“In practice, investors use a combination of listed and private equity investments to fill their African equity allocations. This is expected to continue for the foreseeable future as an effective way to gain exposure to Africa’s growth potential,” explains Ord.

The bourse boost
Criticisms aside, there is strong evidence that a stock market can be an essential part of a developing economy. Studies by the IMF concluded that, supported by the right policies and reforms, stock markets can help African companies expand operations, contributing to economic growth.

Regulators therefore need to ensure that there is an organised, efficient market where the governance standard and permission requirements are on par with international standards. In this respect, experts suggest that fostering better grounds for listing in the African market will boost capital inflows into the region’s economies.

For instance, raising equity finance via the capital market is often considered more profitable than capital raising in private market groups. As such, African entrepreneurs could be motivated to list their businesses if they were made aware of the access to capital – this again would boost the economy.

“Companies are the backbone of economic growth as they drive output and create jobs. Hence, the ability of companies to access growth capital is paramount for increasing employment, domestic spending and investment, resulting in increased GDP,” says Nkontchou.

What’s more, listings enhance transparency and promote good governance, as IPOs subject companies to scrutiny and exposure – another criterion desperately sought after by investors.

Gross-domestic-product-growth-by-regionLarge-scale solutions
Luckily, environments favourable to the growth and improvement of bourses are beginning to take root in Africa. Political stability is increasing inside many countries, including Liberia, Sierra Leone and Côte d’Ivoire, while sound economic policies and accountable institutions are slowly but surely being implemented in key economies such as Nigeria and Kenya. According to the World Bank’s 2013 Global Economic Prospects report, this political stability, as well as higher commodity prices and improved macroeconomic stability, has prompted increased investment flows to Africa. Rwanda, for instance, is now one of Africa’s fastest-growing economies, thanks to its pro-business policies and a positive investment climate.

In comparison, countries with high levels of risk, which may have weak investment laws or lack appropriate financial institutions, are not gaining the same favour with international investors. Uncertainty over the direction of its economic policies has seen the previously booming Zimbabwe Stock Exchange shrink in both size and value. As such, local governments need to weigh the cost and benefits of policies in order to relax principles such as fees, which will allow more international investor participation, while holding on to and enforcing those rules, which are necessary to ensure transparency and economic growth.

“There are certain exchanges that we prefer on the basis of liquidity and market depth, political and economic stability within the countries, and information availability, reporting quality and reporting requirements. In addition, currency stability plays an important role in how an investor views a certain exchange. For example, the trading currency for the BVRM regional exchange is the CFA franc, which is pegged to the euro, and hence more stable than several other local currencies,” explains Nkontchou.

And the creation of regional stock exchanges might be just the thing. With the small size of African stock markets and the absence of liquidity often cited by foreign investors as a major impediment to investing in the region, merging smaller exchanges into regional ones could improve liquidity and make stocks available to a wider range of investors.

Africa currently has two regional bourses serving West and Central African countries, which hold more listings than comparable economies like Libya and Cameroon. With the region poised to see explosive growth, some countries have enforced regulatory frameworks, specialised human capital, and advanced technology such as Nigeria’s X-Gen – the fastest trading platform within the African continent. Others still lag behind. With the potential to tap into an unprecedented economic surge, now is surely the time to introduce regional exchanges that give access to the more developed infrastructure of neighbouring countries.

Government policing has ‘little effectiveness’ controlling banks, says MSCI analyst

Posted on by Ashton Wenborn

As governments and advisory bodies around the world crank up their regulatory efforts, multinational corporations are increasingly facing major fines – some even in the millions. World Finance speaks to Matt Moscardi, Senior Analyst, ESG Research at MSCI, to discuss whether government policing is enough to regulate the banking industry.

World Finance: Now you have the advantage of having a global perspective on some of these global trends. Do you think that Europe versus the US – is one perhaps doing a more effective job at regulating financial institutions?

Matt Moscardi: I think that they’re going about it in two different ways, and they’re having probably the same level of effectiveness. Which is maybe, little effectiveness.

I think in the US they’re trying to just extract as much money as possible from every bank that they’re regulating for egregious behaviour. And I think in the EU – in the UK they’re trying a very similar with the US approach – but in the EU they just don’t do that at all, and they try a very policy, and kind of, best intentions, approach.

I think in the US they’re trying to just extract as much money as possible from every bank that they’re regulating

Even with the bonus caps, it’s more about best intentions.

I think the banks themselves know they’ve been labelled by the financial stability board as ‘too big to fail.’ They know they have government banking, essentially, because of that. They’re being held to higher capital thresholds, sure. But from a regulatory and policing standpoint, the US and the EU have basically said ‘We cannot necessarily police you in the interests of market stability. We can’t put you at real risk, in the interest of market stability.’

And that means that it doesn’t matter necessarily the approach that regulators take to handing out some sort of enforcement. They’re in a bind. As long as these banks are as large and important to these economies as they are, they’re in a little bit of a bind as to what they can do to begin with.

World Finance: Okay, very interesting! Now can you give me some examples of some of those outliers?

Matt Moscardi: Well, we’re already seeing the effects of this for Credit Suisse, who pleads criminally guilty – or criminal negligence, or, they basically copped criminally as part of their settlement agreement with the US for tax evasion… actually, abetting tax evasion.

And the effect has been roughly zero on the company. And the CEO has said as much.

World Finance: Now Matt, at what point do governments play a role in policing some of those big banks?

Matt Moscardi: That’s a good question! I mean, I’m not sure that there is a point. Until they’re willing to disallow market access, rather than meting out fines which are increasingly substantial, but still not deterring behaviour, necessarily.

I also think that the banks themselves have proven they can find loopholes even when there’s government oversight

World Finance: Okay, now Matt, if Libor was calculated by a government agency, do you think we could have avoided this scandal that hit the US as well as the UK a few years ago?

Matt Moscardi: Partially yes. I think that the addition of a government agency in oversight would at least minimise probably the impacts, or the ability of the banks to collude and change the rates. But I also think that the banks themselves have proven they can find loopholes even when there’s government oversight.

The thing that comes to mind is the municipal market in the US, where there are a number of banks who are actually manipulating the bids, and have paid fines for it. So I’m not necessarily sure that it’s a foolproof way to oversee Libor – or Sibor, or Yen Libor, or any of the other global interbank rates. But I do think the oversight of a government agency, or the direct control of a government agency, would most likely limit the impact. Particularly in non-large bank jurisdictions, where it’s smaller banks with better participation.

World Finance: But still, do you ever worry that as you said, you know, they might be able to reduce the possibility that collusion is taking place, but at the same time, an overzealous regulatory body would just add costs to investors by delaying the process? If they are indeed the ones who are producing these indices.

Matt Moscardi: There are many people making the argument that banks themselves – especially at that size – either need to be regulated as utilities, or they need to be broken into smaller pieces.

Now I’m relatively agnostic, whether or not any of that happens. From a pure research perspective, I’m not sure that the cost argument… I mean I know the costs of compliance are increasing, they’re all adding to their compliance officers. But it’s hard to say how much of that is in response to actual new regulation, and how much of that is in response to scandal, and partially marketing and PR.

I personally am very sceptical of any move that any bank does as purely motivated out of, sort of, compliance or risk management.

In terms of the cost argument – whether or not the increased regulation, or overzealous regulators – would actually add to the costs? I’m not sure that argument makes sense, especially when you offset it with the impact to the banks. And when you’re talking impact, the impacts are incredibly broad and systemic when something goes wrong.

I personally am very sceptical of any move that any bank does as purely motivated out of, sort of, compliance or risk management

World Finance: Okay, but you know there’s a certain narrative that runs through any policing effort, and that’s the assumption that fund managers are out to make themselves money at the expense of the rest of us; do you believe that fund managers are really the ones to blame, or has the regulatory world just been too slow to keep pace with change?

Matt Moscardi: The answer’s probably both; fund managers, the banks, and even the regulators, they act on the incentives they have to act. So if a fund manager is paid to find the loophole and obfuscate and move quickly, then that’s what they’ll do at the expense of anything else. And if the regulators are largely either alums of major banks, or they have ties to major banks, or even if they don’t have ties to major banks – I mean, in the US in particular, most of the regulators immediately after leaving go on to consulting gigs with the major banks – if there’s some incentive to slow the pace of regulation, then that’s what they’ll do!

So I think it’s really a question of incentives. And in the EU, where they’re trying to kind of, cap the incentives… even trying to cap the incentives on bonuses, I think that almost misses the point too. I mean, it’s how you’re paying – the mechanism for pay is much more important than the implementation of pay, and capping the pay.

World Finance: Thank you for the insight; Matt Moscardi with MSCI.